Response To Tiny House Listings’ Tiny House Insurance Post

A while ago I did a post on the topic of Tiny House insurance, which you can read here. I have not forgot about that article and have been doing a lot of thinking around it as of late. Then I saw the wonderful post done by Laura Moreland over at Tiny House Listings and in the end she said that she hoped to start the conversation. So I thought it would be fun to do a response to her post!

Like Laura, I am not an insurance expert, so there is a lot to learn about the field, but I’ve done a good bit of research on this and I certainly know tiny houses, so take it for what it is worth.

One thing that Laura pointed out, as I did in my last post, was that there isn’t a real viable option for insuring tiny houses. I have had a rare few tell me they were able to get insurance through a traditional insurance company by doing this or that. Regardless of how the did it or arranged it, I’ll be honest, I don’t trust it. I think if those few folks had to make a major claim they’d never see a dime; I say that not to be ugly, but to make the point that insurance companies will take one look at the tiny house, realize that they should have never said yes to it in the first place and then find a way out of paying.

The one point of contention I will take up with Laura’s post is her logic on how much a tiny house should cost to insure. She stated

In terms of my home [900 square feet], I pay roughly $800 for insurance a year for the house and contents. It stands to reason then that I would expect to pay $200 a year to insure THO because as it stands, it is roughly ¼ of the value.

The point is a fair one in some respects, but I thought I’d propose an alternative line of thought:Insurance companies work on the premise of risk management, to be viable you must take in more money than you would expect to pay out. They operate on the assumption that if they can have a pool of people, that only a certain percentage of them will make a claim. In an ideal world you’d have a large pool of people who are very unlikely to submit a claim.

So essentially when you have a person you want to insure you must be able to determine the risk that insuring that person brings, meaning the likely hood they will submit a claim, how often and for how much. The higher the risk, the higher the cost of the insurance. Insurance companies determine this risk by developing actuarial tables that will predict the likelihood that someone will make a claim. It’s a pretty complex process and based off of really big data sets. The complexity and level of detail that goes into this means that insurance costs vary wildly from location to location, as well as on a ton of other variables.

So the line of thought I’d propose on price is that the cost of insurance for a tiny house should not be based off of value solely, but that of the assumed risk and that you should be collecting more money than you pay out. I think many insurance professionals would agree with this statement. So the question now is, how much risk does a tiny house bring? I think if we were honest about it, the answer is a lot. It is after all why traditional insurance companies won’t insure us, because we are too risky of a proposition.

So while the cost of a tiny house is much less, the risk is much higher. So the costs to insure it will still be pretty high.

This isn’t what a lot of people want to here, but I have a few solutions to this that could help make swallowing this pill a bit easier, but also help keep tiny house insurance premiums lower. The two things we’d want to achieve is to minimize risks so that the group as a whole can cover their members appropriately while being able to ensure stability for the future; second we want to weed out potential bad apples that will abuse, extort or try to game the good intentions of insuring tiny houses.

Be Transparent

I am a true believer that you need to be honest in your dealings with people and when it comes to someone’s home, there is few things in this world that we care about more (of course the people matter more). So the mantra trust, but verify is key here. We need to build a system that is very transparent because we need to earn the trust of our members.

However we choose to structure this, we need to be crystal clear about it. Even though I propose a non profit model, even though it should be transparent, even though this project would have the best intentions, there are some realities and decisions about those realities that will need to be made. Things like the points I propose below are good examples. So we need to be practical, but we also need to be really clear up front and make sure people can easily understand the minimal fine print. If we can do that, then people can make informed decisions about if they want to join or not. If I have learned anything from blogging it is, be honest about who you are and what you stand for and own it.

Enact standards

In order ensure that the tiny houses that are insured aren’t poorly built, we need to develop some sort of standard. The idea being that since tiny houses are often DIY affairs, you need to be sure people aren’t making honest mistakes that could have dangerous consequences. I don’t think this would have to be a huge set of standards, but there are some key areas of focus that we could advise on which would address safety and structural issues.

Now many people will not like to hear me proposing what amounts to building codes, but I think that if we don’t do it ourselves, someone else will at some point; I think we’d rather help determine the direction than a profiteer or politician. Next is that these should be accessible, meaning free and easy to understand. The should also be community driven and reviewed, meaning that people from our community help steer this process, then open it up for feedback from the rest of the community. It should also be used a teaching tool, not as a way to penalize people; the goal should be to empower first time builders and ensure safety.

High deductible policy and diminishing rates

To help reduce the cost of plan, I think we should have it designed in a way that people only make claims on major damage and total loss. If you break a $80 window, it shouldn’t be a claim, because small claims will lead to the insurance fund getting nickled and dimed out of existence; we need to balance being their for people in times of needs and being sure that we can stick around as that protection for tiny house people for the long term.

So to achieve this I propose a high deductible, a level TBD and one that could be lowered as the co-op grows to have more members, which will have people in the insurance co-op will handle small things on their own, but sleep well at night knowing that if their house burns down, we are there for you. The other thing we can do is to encourage people who don’t have any claims by reducing their monthly rate after a certain period of time. So if you have been with the insurance co-op for a few years, your monthly bill will be negligible; this will encourage people to stick with the co-op long term, but also only make a claim when it is really needed. I will also propose an unpopular point here, if you make a claim, your rates will return to normal rates for a pre-determined period; this too will help people make claims on only big things.

Trust, But Verify

With dealing with new members to the co-op I think you should always be trusting, but being that this would be a non profit (meaning for the public good) and that existing members are entrusting you to make decisions for the group to ensure that their tiny houses are protected, you need to do your due diligence on vetting new members and ensuring claims are legitimate. Again, this won’t be a popular point, but if I am going to say to someone, I got your back if things take a turn for the worst, If I’m going to say I am here for you, I mean it. So again, I think if I am transparent about the process, that it will include checks and what those checks are, then you can make an informed decision to join or not.

Okay this turned out to be a lengthy post, I had to gloss over a lot, but here are some of the ideas I wanted to put out there for the conversation.

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8 Comments

I think we should take a good look at the kind of collective self-insurance that Amish farmers use when a community member needs to recover when a disaster.

It’s probably much more simple than starting an organization. I hope the Tiny House community will figure out a way to start an insurance co-op. But all the plans being discussed appear to be just as risky as self-insuring with a savings account – a formal organization could easily fold due to the overhead (everyone would lose their premiums) or someone would find a way to abscond with the cash (leaving everybody else high-and-dry). Something based on compassion for those who have suffered a loss is preferable to arguments over who gets insurance payouts. And each member of the tiny house community would need to set aside some sort of reserve and expect to pay it out to the unfortunate member who loses their house.

Is it the case that insurance companies won’t insure because we’re too big a risk, or because the basic math doesn’t work for us?

There are millions of home owners out there and only a few thousand tiny house owners.

For the sake of easy math lets say there are million regular homes and they cost $100 build from scratch. On average 10% get destroyed every year. In order to make a profit, all an insurance company needs to do is collect $10,000,001 dollars a year so each home owner would pay $10.01 in insurance (10% of 1,000,000 being 100,000. 100,000 times $100 totalling $10,000,000)

But there are only 1000 tiny homes, and they cost $25 to build and because they are not subject to stringent codes on average 20% get destroyed each year. So in order to make a profit they need to charge $5.01 per house.

Now I’ll admit the number are very simplified and totally unrealistic but you can see that even though numbers are much lower that the cost of insuring a tiny house would be close to half that of a regular house purely because you’re drawing from a much smaller premium base to cover your exposure as an insurance company.

And lets not forget, whether we like it or not and insurance company is a business and the purpose of a business is to make a profit.

That being said, I’m sure there is a solution out there and that someone will have the eureka moment that presents a solution.

Perhaps instead of making monthly insurance payments we could pay into some kind of credit union that could supply rebuilding loans at preferential rates based on your contributions would be something that might work?

Starting with a typical for-profit insurance company model likely won’t work, the co-op is closer to what’s needed. I’m reading a book called The Resilience Imperative by Michael Lewis and Pat Conaty that describes a lot of different approaches to finance and social organisation. So far nothing specifically about insurance but it may be worth a look for some of the loan arrangements to see if there’s anything that could be useful.

Insurance for a mobile tiny home that travels a lot is going to have more public liability issues. If your house damages somebody else and/or their property in any way and they or their insurer sue (almost a certainty) the liabilities would be a lot more than just replacing a tiny house. Replacement insurance is a lot more straightforward and easily funded.

One of the cool things about a tiny home is that it doesn’t COST near as much to build, or rebuild.

I spent less than $10K to build my 31′ Tiny house.
I don’t have a mortgage (ding, ding),
owned by a bank who requires that I have Insurance (ding, ding)
to cover the $200K, $300K, or more (ding, ding)
price of the typical, awful tract house.

“having home insurance” is kind of a hold over concept.
If one has $10K or more in savings, I know we don’t all have that, but we SHOULD, that IS your insurance.

I don’t have that savings and I DO have insurance for my home which costs about $438 a year. Having that $10-$20K in savings is a reasonable goal.

I always thought of getting a tiny house for retirement but never considered it might be difficult to get insured. This is going to make me look into it as it is a relatively new subject for insurance companies to address.

I was recently told by an insurance agent that if the tiny house builder is RVIA Certified, he might be able to write a policy. RVIA certification (which I’d never even heard of before) guarantees safe installation of such things as propane lines and electrical wiring for homes on wheels. Sort of guaranteed building standards for tiny houses. I’m in discussion with my builder currently to see if he’d be interested/willing to test/qualify for this certification. I’d even pay for it, if he’ll do it and I think it would be totally worth it! My home is going to cost around $25K excluding appliances. I won’t be able to rebuild if it burns down or a tree falls on it. Anyone familiar with this certification or insuring a tiny house built by a certified builder?